It is a common — and, at least on the surface, logical — belief that higher gas prices lead to higher prices on “Big Oil” stocks.
According to the balance.com, crude oil makes up 71% of the price of gasoline, with the remaining 29% dependent on refinery and distribution costs, corporate profits and state/federal taxes. In California, for example, taxes account for 47.3 cents of every gallon of gas, whereas, in Tennessee, the tax burden is less than half that (22.4 cents per gallon).
The Price of Crude Relative to Gas
However, because taxes and the other aforementioned costs are more or less fixed (at least in the short term), it is the fluctuating price of oil that leads to more or less spending at the pump.
But do these variations lead to more — or less — profit for Big Oil stockholders?
Are Oil Prices and Energy Stock Performance Correlated?
At the risk of killing the suspense just halfway through this article, the answer is not necessarily.
For instance, in 2018, oil prices rose by 31.4% — the biggest increase since 2008 — yet Chevron Corporation (NYSE: CVX) stock fell 9.7%, BP p.l.c. (NYSE: BP) stock dipped 4.6% and Exxon Mobil Corporation (NYSE: XOM) stock dropped 15.1% over the course of the year.
In fact, of the four Big Oil companies surveyed, only ConocoPhillips (NYSE: COP) gave stockholders something to cheer about in 2018 — and that’s no accident. Contrary to what many believe, Big Oil is incredibly diversified, precisely so that company fortunes don’t rise and fall with the price of oil.
This was pointed out by ConocoPhillips’ chairman and CEO Ryan Lance in the company’s latest annual report.
“The ConocoPhillips team delivered another exceptional year in 2018. Our operational performance drove strong financial results and generated sector-leading total shareholder returns (TSR) of 16 percent. We view this strong TSR performance as an endorsement of the disciplined, returns-focused value proposition we launched in late 2016,” Lance wrote.
“At that time, we implemented a strategy that we believe remains the right one for the E&P sector. Although our business is opportunity-rich, it’s also mature, capital intensive and cyclical. In embracing these realities, we’ve led the industry in setting clear priorities for how we’ll allocate cash to generate superior returns through cycles.”
Lance went on to point out financial results in 2018 “surpassed the returns from just a few years ago when Brent [crude oil] prices averaged more than 50 percent higher.”
Upstream, Downstream, Midstream – Diversity Kills the Correlation
Again, this is due to how diversified the vast majority of today’s Big Oil companies are. Most profit from upstream, downstream, and midstream activities. (As one might surmise, upstream activities include the identification, extraction, and production of raw materials, while downstream activities include refining, distribution, and retail. Midstream activities link the two.)
Still, even largely midstream and downstream companies, like Phillips 66 (NYSE: PSX), don’t live and die by gas and oil prices. Since it was spun off from COP in April of 2012, PSX has gained over 234% in real equity value and had just two losing years — but one of those years was 2018, when, as previously noted, the price of oil was surging.
So, just because you’re paying more at the pump this summer doesn’t mean you should invest in Big Oil stocks.
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